New ACA Affordability Percentage and Penalty rates for 2020 are Here!
While changes have been made to the Affordable Care Act (ACA), employers still must comply with the basics of the law. Including offering affordable coverage (employers with more than 50 full-time or equivalent employees) to all full-time employees. In this article, we’ll discuss the new numbers an employer will need to comply beginning January 1, 2020.
But first…
A quick review of where we are today. Beginning in 2019, the federal individual mandate tax was reduced to zero. However, employees may still pay a penalty for not having insurance in some cities and states. Currently, New Jersey, Massachusetts, Vermont and the District of Columbia will assess penalties in 2019. The reduction of the tax may result in more changes—due to this reduction, a challenge as to the constitutionality of the law has been launched in the courts. So, stay tuned!
In July, the Treasury Department and the IRS issued Notice 2019-45 to expand the types of preventative care that can now be covered under a High Deductible Health Plan (HDHP) for people who suffer from certain chronic conditions. This was done because the agencies are aware that the cost for these chronic conditions could be prohibitive to patients. This could result in some people avoiding the necessary care to prevent the condition from getting worse. The consequences of this avoidance of care would require more extensive and higher cost treatments in the future. A list of the conditions and treatments are listed in the Notice.
The Cadillac tax may be on the way out. Watch H.R. 748, the Middle Class Health Benefits Tax Repeal Act of 2019 as it makes it way from the House to the Senate. This bill would repeal the 40% excise tax on plans that exceed a specified threshold. If the tax is not repealed, it is scheduled to take effective in 2022. It seems to have bi-partisan support, but it is unclear if the Senate will take up the bill this year.
Finally, in June the IRS issued a list of FAQs about the new Individual Coverage Health Reimbursement Arrangement (ICHRA) and Excepted Benefit Health Reimbursement Arrangements (EBHRA). The new ICHRA can be offered as an alternative to traditional group health plan coverage (subject to certain conditions). The EBHRA may permit employers to finance additional medical expenses (such as the cost of copays, deductibles or other expenses not covered under the group health plan) even if the employee declines enrollment in the traditional group health plan. The effective date for these new plans is January 1, 2020.
ACA Affordability Percentage
On July 22, 2019 the IRS issued Revenue Procedure 2019-29 which announced the affordability threshold for the ACA employer mandate would be 9.78% for plan years beginning in calendar year 2020.
Here are the rates for prior years:
- 2015 Percentage: 9.56%
- 2016 Percentage: 9.56%
- 2017 Percentage: 9.69%
- 2018 Percentage: 9.56%
- 2019 Percentage: 9.86%
- 2020 Percentage: 9.78%
IRC §4980H(a) Penalty
This penalty applies when an applicable large employer (ALE) fails to offer minimum essential coverage to at least 95% of its full-time employees in any calendar month during the year. The penalty is assessed after at least one full-time employee, who was not offered minimum essential coverage, enrolled in subsidized coverage on the Exchange. Note, this penalty does not take into account the affordability of the coverage, only that a sufficient percentage of full-time employees were offered a qualified major medical plan.
The penalty is:
- 2018 Part A Penalty: $2,320 ($193.33 per month)
- 2019 Part A Penalty: $2,500 (208.33 per month)
- 2020 Part A Penalty: $2,570 (214.17 per month)
The calculation…
The penalty is applied to all full-time employees, minus the first 30.
Example
Acme Company has 56 employees and does not offer any group health coverage. One of the employees applied for and was approved for a subsidized plan on the Exchange. The cost to this employer for 2020 would be $66,820. (56-30=26 x 2,570).
IRC §4980H(b) Penalty
This penalty applies to each full-time employee who enrolled in the Exchange and was not offered minimum essential coverage, affordable coverage or coverage that did not provide minimum value. This penalty will not be assessed on all full-time employees, but rather just those who enrolled in the Exchange. Also, an employer cannot be assessed both the Part A and Part B penalties. Only one will be applied.
The penalty is:
- 2018 Part B Penalty: $3,480 ($290 per month)
- 2019 Part B Penalty: $3,750 ($312.50 per month)
- 2020 Part B Penalty: $3,860 ($321.67 per month)
The calculation…
The penalty is only applied to any full-time employee who declines the offer of coverage and instead enrolls in an Exchange plan because the plan was unaffordable, did not offer minimum essential coverage or did not provide minimum value.
Example
Nuts and Bolts Company has 66 full-time employees. It offers a group health plan that meets the minimum essential coverage required under ACA. However, three employees enrolled in an Exchange plan because the offered plan was unaffordable. After review, it was determined that in fact, the offered coverage was unaffordable to the affected employees. The cost for 2020 for this employer would be $11,580 (3 x 3,860).
How Does the ACA Affordability Test Work?
The affordability test is calculated by using the employee-share of the premium for employee-only coverage under the employer’s lowest cost plan option. The employee must be eligible to enroll in the plan and the plan must provide minimum value. Basically, you look at the lowest amount the employee could pay to enroll in the ALE’s group major medical plan.
Caution: If you have employees who have different options available based on classification or location, you must test each group. For example, if an employer has employees in Illinois and Florida, the affordability of the lowest cost plan for each state must be calculated.
The IRS provides three safe harbors for ALE’s to determine whether an offered coverage is affordable in order to avoid the Part B Penalty.
- Federal Poverty Line Affordability Safe Harbor
- Rate of Pay Affordability Safe Harbor
- Form W-2 Affordability Safe Harbor
If the employer meets any of these safe harbors, the offer of coverage is considered affordable for Part B Penalty purposes. This applies even if the employee may qualify for Exchange subsidies based on the actual income of the employee and number of members in the household. Also, if the employee enrolls in a high cost family plan coverage option, the affordability status is determined by using the lowest cost employee-only coverage option available to that employee—not the actual plan enrolled in.
Finally, an employer may use more than one affordability safe harbor if the categories are reasonable. Examples would be specific job categories, salary vs hourly, geographic location or any other bonified business criteria. However, caution should be exercised to not use a category that would target a specific employee.
Which Safe Harbor Should an ALE Use?
It is up to the employer to determine which of the three options will work best for their business. However here is a quick overview of each type of affordability special harbor.
The Federal Poverty Line Affordability Safe Harbor
In order to qualify for this safe harbor, the employee-share of premium for the lowest cost plan option at the employee-only coverage level cannot exceed 9.78% (2020) of the continental US federal poverty line for a single individual that is in effect within six months before the first day of the plan year, divided by 12. Several employer’s find this the easiest method to use.
The Federal Poverty Line Affordability Safe Harbor for 2018 thru 2020 calendar years would be:
- 2018 Federal Poverty Line Limit: $96.08 (12,060 x .0956 / 12)
- 2019 Federal Poverty Line Limit: $99.75 (12,140 x .0986 / 12)
- 2020 Federal Poverty Line Limit: $101.79 (12,490 x .0978 / 12)
This means in calendar year 2020, the employee’s share of the ALE’s lowest cost employee-only coverage option should not exceed $101.79.
The Rate of Pay Affordability Safe Harbor
This safe harbor applies the affordability percentage based on two different types of tests. The first, for hourly full-time employees and the second, for salaried full-time employees. This option is used by many employers who do not use the federal poverty line affordability safe harbor.
Hourly Full-Time Employee Test
The calculation: 9.78% (2020 rate) of an employee’s hourly rate of pay as of the first day of the coverage period times 130 hours (the IRS uses a standard of 130 hours regardless of actual hours of service performed). Note: If the hourly rate of pay is decreased, the employer must calculate a new required premium cap for that month. If an employee gets a raise to a higher hourly rate mid-year, the employer would still use the hourly rate as of the first day of the plan year.
Example
Acme Company’s lowest paid full-time hourly employees are paid a rate of $12 per hour for each calendar month in 2020. The assumed monthly income would be $1,560 (130 x $12). Consequently, the full-time employee monthly contribution rate for the lowest cost, employee-only coverage cannot exceed $152.57 per month. ($1,560 x .0978)
Salaried Full-Time Employees Test:
The calculation: 9.78% (2020 rate) of an employee’s monthly salary as of the first day of the coverage period. Note: You cannot use the rate of pay safe harbor for any salaried individuals who experience a pay reduction in any month during the calendar year.
Example
Acme Company’s lowest paid full-time salaried employees are paid a salary of $35,000 in 2020. The monthly premium would be $2,917 ($35,000 / 12). Consequently, the full-time employee monthly contribution rate for the lowest cost, employee-only coverage cannot exceed $285.28 per month($2,917 x .0978).
Using these examples, the Acme Company’s plan would be considered affordable for all full-time employees (hourly and salaried) if the lowest possible amount that an employee could pay to enroll in the employer’s plan does not exceed $152.57 per month.
Caution: The rate of pay safe harbor cannot be used for employees who receive tips or if pay is based solely on commissions. In this situation it may be better to use the Federal Poverty Line Affordability Safe Harbor. Using the Form W-2 Affordability Safe Harbor would be difficult due to the unpredictability of annual income.
The Form W-2 Affordability Safe Harbor
This safe harbor provides coverage if the affordable employee share of employee only option for the lowest cost plan does not exceed 9.78% of the employee’s Box 1 wages on Form W-2.
Care should be taken if using this approach. There are disadvantages:
- Unpredictable – An employer will not know until January 2021 if the coverage offered is considered affordable for the year 2020.
- No Correction – An employer cannot adjust to offset a reduction in pay, even though the safe harbor is calculated at the end of the year.
- Consistency – The employee’s premium contribution must be consistent through the year as either a dollar amount or percentage of W-2 wages. This is difficult to do using estimated wages. While a specific percentage of W-2 wages can be set for each pay period, this may become confusing for employees as the amount could change each month.
However, if an employer has salaried employees whose earnings are consistent from year to year, this option may work best.
Example 1
Acme Company offers Jason coverage for the entire year of 2020. His wages according to Box 1 of his W-2 are $30,000. Acme Company will be considered to offer affordable coverage if Jason is not charged more than $244.50 per month for coverage ($30,000 x .0978)/12).
Example 2
Nuts and Bolts Company hires Maria on June 15, 2020. She is offered coverage after her waiting period on August 1, 2020. Her W-2 wages according to Box 1 is $15,000. When a person is only employed for a partial year, an adjustment can be made to calculate affordability. Her adjusted W-2 wage would be $10,714 ($15,000 x 5 mo covered/7 mo employed). Nuts and Bolts Company will be considered to offer affordable coverage if Maria is not charged more than $209.57 ($10,714 x .0978/5).
Final thoughts…
Even though change may be on the horizon for the Affordable Care Act, employers must comply with the rules that exist today. Consequently, an employer should review the following before the beginning of calendar year 2020:
- Determine if the company will be considered an applicable large employer, especially if your company is close to the 50 full-time employee threshold.
- Determine the contribution rate that will apply for your major medical plan(s) effective 1/1/2020 to ensure the employee-share of employee-only option for the lowest cost plan will be considered affordable.
- Review the current status of affordability for employees in 2019 to identify any potential problems. While you can’t correct the problem at this point, it will give you time to prepare a response should you receive a penalty letter or to budget for potential penalties.
Check back with BCLHRHelper.com to keep up with any changes that may affect the Affordable Care Act. Better yet, why not sign up to receive an alert of the changes in your email?
This information is educational and not meant to provide legal advice. A legal professional should always be consulted. This entire article is protected by Copyright and any unauthorized use is strictly prohibited. For permission to utilize this article, please contact BCL Systems, Inc. at robinb@bclsys.com.